Understanding Investments
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I put together this "Investing 101" presentation for my team of marketing/media/advertising professionals to encourage 401k participation and explain the importance of savings, retirement and financial health.
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Understanding Investments
- 2. Agenda I. When is the right time to start saving? I. What are my best investment options? III. A guide to building a successful portfolio IV. Getting financially healthy
- 3. DISCLOSURE: • I am not an investment advisor • I am not giving financial advice, I am providing opinion based on my experience • Should you choose to listen to or follow my opinion, you acknowledge that you accept all risks involved
- 4. A Dollar Today or a Dollar a Year From Now? • Time Value of Money (TVM) concept states that money received today is more valuable than money received in the future by the amount of interest we can earn with the money • As a result, investors expect/require payment (interest, dividends, capital appreciation) for use of their funds • TVM also takes into account risk aversion - both default risk and inflation risk • $100 today is a sure thing and can be enjoyed now. In 5 years that money could be worth much less
- 5. A Little Inflation Goes a Long Way Item 1969 1989 1999 2009 Bread $0.29 $1.29 $1.99 $2.49 Tomato Soup 9 for $1.00 2 for $1.00 $.99 each $1.14 each Dozen Eggs $0.47 $1.19 $2.25 $1.34 Chicken $.23 lb. $1.29 lb. $2.50 lb. $2.25 lb. Movie Ticket $1.00 $5.00 $8.00 $8.20 New Ford Car $2,200 $14,000 $21,000 $24,000 3-Bdrm Home $19,000 $105,000 $248,000 $232,880 At 3% inflation, costs double every 24 years
- 6. So how do we beat inflation?
- 7. “THE MOST POWERFUL FORCE IN THE UNIVERSE IS COMPOUND INTEREST”
- 8. The Power of Compound Interest Year Principal Interest Total 1 100 8 108 2 100 8 116 3 100 8 124 4 100 8 132 5 100 8 140 Earned Interest $40 Year Principal Interest Total 1 100 8 108 2 108 16.64 116.64 3 116.64 25.97 125.97 4 125.97 36.05 136.05 5 136.05 46.93 146.93 Earned Interest $46.93 • Simple Interest • Compound Interest • 5-year return = 8% • 5-year return = 9.4% ~ 17% greater return
- 9. When should I start saving? Age Retirement Age Monthly Contribution Rate of Return Final Balance 25 65 $100 8% $349,101 30 65 $100 8% $229,388 35 65 $100 8% $149,036 40 65 $100 8% $95,103 45 65 $100 8% $58,902 50 65 $100 8% $34,604
- 10. It’s not timing the market, it’s time in the market Age Retirement Age Monthly Contribution Rate of Return Final Balance 25 65 $287 8% $1MM 30 65 $440 8% $1MM 35 65 $675 8% $1MM 40 65 $1,060 8% $1MM 45 65 $1,700 8% $1MM 50 65 $2,900 8% $1MM
- 11. But I’ll lose money if the market goes down
- 12. Denial, Discipline & Dollar Cost Averaging • 96% percent of Americans spend before they save – only 4% practice the denial and discipline required to build wealth and provide for a comfortable retirement • Dollar cost averaging can be an attractive option for investors who contribute to their investment portfolios on a regular basis • It eliminates the issue of “market timing” • As a result, your returns will be determined more by the overall trend in a given stock as opposed to the investor's specific entry price • It may help reduce your cost basis on securities that decline in value
- 13. Example: Dollar Cost Averaging Date Price/Share Shares Cost May 1st $20 50 $1,000 Jun. 1st $15 66.66 $1,000 Jul. 1st $10 100 $1,000 Aug. 1st $18 55.55 $1,000 Total 272.22 $4,000 Avg. Price per Share $14.69
- 14. Result: Dollar Cost Averaging • In this example… • 272.22 shares @ $18 = $4,900 • Profit of $900 or 22.5% • If the $4,000 was invested all at once at the beginning: • 200 shares @ $20 per share = $4,000 • Now worth $18/share x 200 = $3,600 = loss of $400
- 16. Low Risk, Low Return • Savings Accounts • 0 – 2% per year • Checking Accounts • 0 – 1% per year • Certificates of Deposits (CD’s) • 1 – 3% per year • Depends on time commitment • Money Market Accounts • 1 – 3% per year
- 17. Low - Medium Risk, Medium Return • Treasury Bonds • 3 – 5% per year • Municipal Bonds • 4 – 6% per year • Tax sheltered • Investment Grade Corporate Bonds • 4 – 7% per year
- 18. Medium Risk, Medium – High Return • Index Funds • S&P 500, 15 years, ARR 12% per year • Mutual Funds • 8 – 10% per year, average • Fund of Funds • 5 – 7% per year • REIT’s • Variable
- 19. High Risk, High Return • IPOs • Options & Futures • High Yield (“Junk”) Bonds • Angel Investing • Speculative Real Estate • Currency Exchange Markets • Developing Markets
- 20. US Stocks perform well over time
- 21. Stocks, Bonds & Mutual Fund Basics • Stocks - share of ownership entitling the stockholder to dividends and to other rights of ownership, such as voting rights • Bonds - debt issued by a government or corporation guaranteeing payment of the original investment plus interest by a specified future date • Mutual Funds - A security that gives investors access to a diversified portfolio of equities, bonds and other securities
- 22. Diversification through Mutual Funds • Professionally managed • Risk is spread among numerous investment vehicles
- 23. Mutual Fund Recap • Each shareholder participates in the gain or loss of the fund • The fund's net asset value (NAV) is determined each day • Each mutual fund portfolio is invested to match the objective stated in the prospectus • Caveat emptor - a majority of mutual funds fail to beat the market • Also, picking mutual funds purely on the basis of past performance may or may not work • Bet on the fund manager – not necessarily the fund
- 24. Why contribute to your 401(k)? Free money! • Company matching • Guarantees a return of 50% on your first 6% • Pretax withdrawal • Lowers your taxable income • Three-year vesting schedule • Profit sharing added to account • Earnings grow tax deferred
- 25. Where to start
- 26. 5 Steps to Financial Health 1. Pay yourself first
- 27. 5 Steps to Financial Health 1. Pay yourself first 2. Accumulate 3-6 months of your income in the bank
- 28. 5 Steps to Financial Health 1. Pay yourself first 2. Accumulate 3-6 months of your income in the bank 3. Pay cash for purchases
- 29. 5 Steps to Financial Health 1. Pay yourself first 2. Accumulate 3-6 months of your income in the bank 3. Pay cash for purchases 4. Reduce your credit card debt…slowly
- 30. 5 Steps to Financial Health 1. Pay yourself first 2. Accumulate 3-6 months of your income in the bank 3. Pay cash for purchases 4. Reduce your credit card debt…slowly 5. Move cautiously into investments
- 31. Achieving Financial Balance • Open a Saving-to-Spend account, so you can live for today • Open Saving-to-Keep account, so you can plan for tomorrow • Once you’ve built the foundation and taken advantage of our 401(k) program, some options for saving/investing to consider: • Betterment • Wealthfront • Vanguard
- 32. Let’s see how you’re doing • Net Worth = value of everything you own minus the balance on everything you owe • Rule of thumb = 10% of age X income • Age: 30 yrs old (30 x .1 = 3) • Salary: $40,000 • 3 x $40,000 = $120,000 • Rule of 72 • 72 / your % return = # of years until your money doubles • If your investments are growing at 8% per year, your money will double in 9 years
- 33. Thank you! Bryan A. Jackson @bajatl
Editor's Notes
- Even at a current “benign” inflation rate of 3% -- costs will double every 24 years. Rule of 72….
- Interest on principal only vs interest on principal and interest.
- The best day to plant a tree was twenty years ago. The second best day is today.
- The 3 Ds
- Let’s say you get a tax refund of $4000 and want to invest in the market.
- Step #1: Pay yourself first. There are only two kinds of people in the world, economically speaking: People who save first, and spend what's left People who spend first and try to save what's left. Only all too often, they find there isn't anything left. Now listen carefully, because you are about to hear the most powerful phrase you have ever heard about finances: For a lifetime, the people who spend first will always have to work for and be dependent on the people who save first. You must decide which group you want to be in. Most people, of course, want to "save first.'' But only 4 percent of our society falls into that group. The other 96 percent of Americans spend first and try to save what's left, which rarely happens. That's why most people are living lives of quiet economic desperation, begging for overtime instead of free time. To become a "saver,'' set up automatic deductions from your paycheck into a savings account. That way your bank account gets it before you do.
- Step #2: Accumulate 3-6 months of your income in the bank. When a home is built, are the walls and roof put up first? Of course not. The foundation must first be poured. Well, that's how it works in savings, too. Money in the bank is the foundation of a balanced financial plan. The stronger the savings foundation, the higher you can build the investment walls. That way, if an emergency comes up -- your car dies, you lose your job, you get sick -- you can tap your cash reserves and not have to use your credit cards. So before you begin investing long-term, you must prove you have the discipline to put money in savings and leave it there.
- Step #3: Pay cash for purchases. Decide on your short-term and long-term goals -- a house, a car, a cruise, college education for your kids -- and stay focused on them. Resist the economic trap of advertising, and don't buy something if you don't have the money to pay for it. Put away those credit cards. Save up until you can pay cash. Everybody is after your money, so remember that denial and discipline must be incorporated, if you are to excel, which is both difficult and rare. Of course, balance is the key in finances, so you must live for today while planning for tomorrow. To do that, you should set up 2 bank accounts -- a. "saving to spend'' account for short-term purchases such as clothes, cars, home maintenance and vacations, and a "saving to keep'' account for investments and other long-term goals such as education and retirement.
- Step #4: Reduce your credit card debt slowly. You didn't get into debt overnight and you're not going to get out of it that quickly, either. Despite popular opinion, it makes no sense to take all your cash and apply it to your debt: Next time something comes up, you won't have any money in the bank and will have to use your credit cards again, adding to your debt instead of reducing it.
- Step #5: Move cautiously into investments . Once you've accumulated 3-6 months of income in the bank, it's time to begin investing cautiously and consistently. I recommend dollar-cost averaging into mutual funds -- investing at regular intervals over time as you do with a 401K plan. Dollar-cost averaging takes all the emotions, and the Maalox moments, out of investing because even when the stock market falls, it's good news. When the market crashes, you're excited because you're buying more for less. For example, if the market falls 50 percent, you're buying twice as many shares for half the price. Here's why: When stocks fall in price, your regular contribution lets you buy them at a discount. That means you'll get more shares for your money. Eventually the market will rally again and your portfolio will increase in value even more than if the market had never fallen. Meanwhile, don't forget to take full advantage of 401Ks, IRAs and other tax-deferred plans to help build up your investments painlessly
- Savings is the foundation you build upon. The stronger the savings foundation, the higher you can build the investment walls. For perfect financial balance, I recommend setting up two accounts: 1) A Saving-to-Spend account, so you can live for today. Use this account for vacations, clothes, car maintenance and upgrades, and home improvement. Contribute to this account every paycheck, add time and be patient. Then, when you want to buy something, use the cash you've saved in this account. 2) A Saving-to-Keep account, so you can plan for tomorrow. Use this account to accumulate money for long-term investments and for your future. If you put money here on a regular basis and leave it alone, it will eventually provide you with so much financial freedom you won't have to work another day, unless you want to. How do you make sure you can put money into investments and never have to sell them, even if you lose your job? Money in the bank. How can you make sure you always have money to take advantage of a great investment opportunity? Money in the bank. How do you make sure you never have a credit card balance you can't pay off every month? Why do people carry credit card balances? No money in the bank. So they go to Visa Bank where they pay interest instead of earning it.